November 1, 2010 / 7:40 PM / 7 years ago

PREVIEW-Canadian insurers' results seen stronger, but messy

* Strong equities expected to offset low rates, writedowns

* Manulife seen posting C$1 bln-plus loss

* Stocks could be poised to rebound, analysts say

By Cameron French

TORONTO, Nov 1 (Reuters) - Low interest rates and writedowns are expected to lead to another messy quarter for Canada’s insurers, but recent stock market strength means the profit picture should be brighter than last quarter’s weak results.

And, with expectations modest for the sector, analysts say even slightly positive results could light a fire under the insurers’ struggling shares.

“I think an as-expected quarter would go a long way, because I think there’s a negative bias, largely because the results have just really underperformed expectations for many quarters now,” said Craig Fehr, an analyst at Edward Jones in St. Louis, Missouri.

While the country’s big insurers -- led by Manulife Financial (MFC.TO) and Sun Life Financial (SLF.TO) -- have seen their core businesses improve as they have emerged from the financial crisis, macro-economic factors have driven their bottom line performance so far this year.

Their results were stung last quarter by the combination of weak stock markets and low bond yields, which reduced the return on their assets and forced them to hold more capital to pay off future liabilities such as policies and fixed annuity investments.

While bond yields have continued to slide this quarter, equity markets rose 9.5 percent during the July-September period, a big shift from the 6.2 percent drop in the second quarter which helped send Manulife to a C$2.4 billion ($2.35 billion) loss.

“Unlike in the second quarter, where almost every macro factor moved against the Canadian insurers, the recovery of the equity markets should be sufficient to offset the impact of incremental declines in government bond yields,” Barclays Capital analyst John Aiken said in a note.

Despite the stock market rally, Aiken said the outlook for earnings from Manulife and No. 3 insurer Sun Life are "far from good." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For sector comparison click: link.reuters.com/kar33q ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

In addition to the losses related to weaker bond yields Manulife is expected to take a charge to increase reserves for its long-term-care insurance business, which has seen higher than expected claims.

CIBC World Markets analysts Robert Sedran expects that charge to amount to C$800 million, while the company could also take a charge of C$700 million on a re-evaluation of actuarial assumptions that the company is conducting.

Sun Life may also take a charge for actuarial assumptions, analysts said, although they did not forecast amounts.

Great-West Lifeco (GWO.TO), which of the three has the least exposure to stock and bond markets, is expected to report results in line with both its previous quarter and the year-before quarter.

While the profit picture looks to be mixed, analysts say the volatility has already been factored in by stock markets, meaning any signs of strength could give the group a lift.

Indeed, while the S&P/TSX composite index .GSPTSE rose nearly 10 percent during the quarter, Manulife dropped 9.2 percent, while Sun Life slid 3.7 percent over the same period. Great-West, which is 72 percent owned by Power Financial Corp (PWF.TO), rose 5.8 percent.

“I think there’s a lot of value there,” said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.

No. 4 insurer Industrial Alliance (IAG.TO) will kick off third-quarter reporting period on Wednesday.

$1=$1.02 Canadian Reporting by Cameron French; editing by Rob Wilson

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